In this article

Overview

Pensions simplification brought us the ‘annual allowance’ for pension savings, on 6 April 2006. At its highest level this reached £255,000 but, since then, we’ve seen a massive drop in the AA limit followed by the ability to ‘carry forward’ unused annual allowance to offset AA excesses.

This means there is a lot to remember and here we answer some common questions we are asked on these topics.

If you have a question that is not answered here, remember tax relief rules and annual allowance rules work separately. Both sets of rules must be correctly considered to ensure pension savings are tax efficient.

the limits for tax relief on personal, 3rd party and employer contributions.

the different methods used to receive tax relief and when relevant earnings below the personal allowance mean no tax relief is due.

the separate annual allowance test which can reduce the tax efficiency of any pension savings.

Annual allowance – pension input periods

Q: Is it possible to amend the pension input period for a pension plan so the member can use next tax year’s annual allowance in the current tax year?

A: No. The ability to nominate a pension input period (PIP) end date was stopped on 9 July 2015. From that date all PIPs must align to the tax year (although this change didn’t affect PIPs which ended before 9 July 2015.)

Q: If I transferred pension funds during a pension input period, did the transfer payment reset the PIP end date?

A: No. This is only relevant historically now but, where you had a PIP prior to the 2015/16 transitional rules announcement and, for example, say it started on 2 May and ended on 1 May, however you transferred the pension fund in December, you would still take into account pension contributions paid from 2 May up to the date of transfer which would be tested against the annual allowance for the tax year in which the 1 May original PIP end date falls. So PIP dates were 2 May 2013 to 1 May 2014 but a transfer was paid in December 2013, pension contributions were tested against the 2014/15 annual allowance.

Carry forward

Q: How do I claim carry forward?

A: There is no ‘claim’ process. The client and their adviser should add up all pension savings made in the pension input periods ending in the tax year. This includes individual contributions and contributions paid on the client’s behalf by anyone else, e.g. an employer or third parties. Where the total pension input amount exceeds the annual allowance (or Money Purchase AA or Tapered AA if either applies), the client needs to calculate any unused annual allowance from the 3 earlier tax years, where eligible, which could be carried forward to reduce or absorb the excess pension input amount. To be eligible, the individual must have been a member of a registered pension scheme at some point in the earlier tax year(s). NB it is not possible to use carry forward to increase the MPAA limit for defined contribution pension savings.

This exercise should be documented and evidence retained by the client in case of a request from HMRC to complete their audit. In the event the client does not have sufficient annual allowance to eliminate the full excess, the excess amount must be reported on the client’s self-assessment tax return and the relevant tax charge accounted for.

Q: Where the tapered annual allowance will apply in the current tax year, can my client still use carry forward from the three earlier tax years to pay a larger pension contribution?

A: Yes, carry forward still works in the same way so you can use unused AA from the 3 earlier tax years (bearing in mind, even where no contribution was paid, this may be a reduced TAA level depending on taxable income etc in that earlier tax year) to reduce or absorb any pension savings in excess of the current tax year’s tapered AA limit. Watch out for the circular calculation where employer contributions are included which we cover in our planning ideas and potential pitfalls article.

Q: Where you are subject to a tapered annual allowance for a tax year but don’t use any/ all of it, can you then carry forward the full standard annual allowance for the next 3 tax years?

A: If you are subject to a tapered annual allowance for a tax year, it is only the unused TAA amount that can be used in future for carry forward.

Q: Can a self-employed person pay in a large contribution using carry forward before taking benefits?

A: Tax relief is restricted to a maximum contribution of 100% of relevant earnings in the tax year the contribution is paid. The annual allowance test also applies and carry forward can be used where eligible. We cover this in detail in our interaction of tax relief and annual allowance article.

A: Request a Pension Savings Statement (PSS) for all schemes for which the client is an active member.

A PSS will confirm the pension input periods, pension input amounts and the correct tax year these relate to, which is the information needed for carry forward calculations. If you request a 2018/2019 PSS it will confirm the total PIAs applying to the PIPs ending in 2018/2019 and the previous three tax years, including a breakdown of the Pre and Post-alignment PIAs for 2015/16.

Remember client’s may have a mixture of money purchase and defined benefits (DB) schemes, so requesting a PSS from all schemes is key. This is much more efficient than trawling through money purchase contribution histories or trying to manually calculate the pension input amount for a DB scheme, particularly when you need to calculate the pre and post-alignment pension input amounts for the 15/16 tax year. Once you have this information it is simply a case of adding the PIAs together (if the client has more than one scheme). Also remember that if the client has had excesses in any of the previous three years you will need the input amounts for the three tax years prior to the tax year the excess occurred to determine what unused annual allowance remains.

Q: When is a pension savings statement (PSS) automatically provided?

A: Pension schemes must automatically provide members with a standard PSS if the pension input amounts received by their scheme exceed the annual allowance. If the member has more than one pot under the same scheme the statement must cover all of their pension pots in that scheme. If the member has flexibly accessed their pension savings the scheme must provide a money purchase pension savings statement if the inputs exceed the money purchase annual allowance (MPAA). The scheme must provide the relevant statement by 6 October following the end of the tax year.

However, if they don’t receive a statement, this does not mean they have not exceeded their annual allowance or MPAA, it just means they haven’t exceeded the allowance in any one individual scheme. You still need to assess the total pension input amounts for all schemes to determine whether or not the client has an annual allowance or MPAA/ TAA excess.

Q: If my client will not get a pension savings statement automatically, can the member request one and how long will it take to receive the statement?

A: The scheme must provide the statement within the later of; three months of receiving the request, and 6th October following the end of the relevant tax year. There will be circumstances when the scheme requires information from another person, such as the employer, in which case the scheme will have three months from receipt of the information to send the statement.

Before pension contribution planning with affected clients, particularly where you think they may have an unidentified annual allowance excess in a previous tax year, you may want to contact these clients to ask them to request pension savings statements. This will ensure you have the input amounts to hand and can work out any unused annual allowance they have available or if they need to report and pay an excess charge.

Q: What’s the point of an £80,000 pre-alignment Annual Allowance, if you can only carry forward £40,000 into the post-alignment period?

A: This is only relevant historically now as it dates back to 9 July 2015 and the announcement for the introduction of the Pension Input Period transitional rules. The government introduced an £80k limit in the pre-alignment tax-year, with restrictions preventing members from using the full unused amount in the post-alignment period (the maximum allowed to be carried forward was limited to £40,000).

The reason for an AA of £80,000 for the pre-alignment tax period was that, prior to the budget a client could have used their 2015/16 £40k, PLUS 2016/17 £40k so when the 2016/17 arrangement’s PIP was ended early both PIP’s were tested in 2015/16.

Let’s work through an example of where this would have been the case:

Before the Budget in July, a client who had sufficient income, chose to pay £80,000 into their pension plan before the end of the 2015/16 tax year. They paid a gross amount of £40,000 on the 1 May 2015.

The clients PIP usually ran from 6th April to 5th April. However, the client could, before the summer Budget ended the ability to do so, nominate to close their PIP at an earlier date , so, they nominated 30 May 2015.

The end of the first input period (30/05/2015) was in the 2015/16 tax year therefore the annual allowance was £40,000. No other pension contributions were paid by them (or on their behalf) in the same pension input period or to pension input periods ending in 2015/16 for other pension plans, and there was no annual allowance charge.

On 1 June 2015, they paid an additional gross amount of £40,000.

The second contribution was paid in a pension input period that was scheduled to end on 30 May 2016. This would have fallen in the 2016/17 tax year, using the annual allowance of £40,000. This planning was sound, as long as no other pension contributions were paid by them or on their behalf in the same pension input period or pension input periods ending in 2016/17 for other pension plans, there was no annual allowance excess or charge.

In this example, by moving the client’s PIP, a gross amount of £80,000 was paid in the 2015/16 tax year.

This client used the rules as they existed before 9 July 2015 to pay £80,000 prior to the budget, so unless the government introduced a pre-alignment AA of £80,000, this client would have fallen foul of the AA charge, purely as a result of the government electing to end all PIP’s on the day of the Budget.

However, although the government wanted to protect such people against the retrospective application of the AA charge, they didn’t want to open the flood gates to those to which the above did not apply. Hence the fact that the post-alignment AA is £0, but you were allowed to carry forward any unused pre-alignment AA up to a maximum of £40,000. This gives the potential for people who had made contributions in the pre-alignment period, to pay further contributions in the post alignment period, the combined value of which could be in excess of the originally anticipated £40,000.

The above assumes no ‘traditional’ carry forward was available.

Q: How do I get a carryback form?

A: ‘Carryback’ is not a current term in the world of pensions. Unused tax relief can no longer be carried backwards or forwards to other tax years. What is available is carry forward of unused annual allowance. There is no form required to use carry forward.

Money purchase annual allowance

Q: If someone triggered the Money Purchase Annual Allowance before 6th April 2017, do they retain a higher MPAA limit of £10,000 per annum? i.e. does the reduced limit introduced on 6 April 2017 only affect those who trigger the MPAA on or after that date?

A: No. In this tax year, the MPAA limit of £4,000 applies for all members who have flexibly accessed their own pension pots since 6 April 2015 or who held a flexible drawdown arrangement prior to 6 April 2015.

Q: My client received a letter confirming they triggered the Money Purchase Annual Allowance on 5th April 2019. Has this reduced their annual allowance to £4,000 for all inputs made in the 2018/19 tax year?

A: No. The MPAA only applies from its trigger date so any contributions paid prior to this date are subject to the standard AA rules.

Q: Heather triggered the money purchase annual allowance last tax year. Will her annual employer pension contribution of £5,000 paid on 28th April this year be tested against the £4,000 limit?

A: As per the standard AA rules, all pension savings made by or on behalf of an individual are tested against their annual allowance, so yes, employer contributions will use up a member’s annual allowance.

Where the contribution for Heather is paid to a DC scheme, this will use up all of the MPAA for this tax year and, as it is not possible to use carry forward to increase the MPAA limit, this will create an annual allowance excess of £1,000 which Heather must report through self-assessment along with the annual allowance charge due.

Q: If my client opts for an annuity with a guarantee period greater than 10 years, does this trigger the MPAA?

A: No, this is not the case. It's where the income amount can reduce other than in prescribed circumstances that is the trigger. An example of a prescribed circumstance (which would not trigger the MPAA) would be where the annuity is based on RPI and RPI is negative.

Tapered annual allowance

A: No. The tapered annual allowance applies to all pension input amounts from all registered and overseas pension schemes which are subject to the annual allowance rules.

Q: I know my adjusted income will exceed £150k, do I still need to calculate my threshold income?

A: We would say yes, because if your threshold income works out at less than £110,000 you would not be impacted by the tapered annual allowance rules (as you need to breach both limits to be impacted).

It may be more efficient to look at these calculations the other way around. If you calculate threshold income first (which is slightly less onerous), then it’s only where this exceeds £110,000 that you need to determine your adjusted income figure.

Q: My client has a tapered annual allowance for the current tax year, can they use carry forward? And if so, do we have to work out a tapered allowance for the earlier 3 years?

A: There is no change to the carry forward rules. Where a member will exceed their tapered annual allowance, they should check for any unused annual allowance from the earlier 3 years, if eligible, based on the standard rules – which means using the TAA limit if one applies for any tax year from 2016/17 onwards.

Q: How does the tapered annual allowance calculation work?

A: Here is a simplistic example;

Client has gross salary of £150,000

Member of NHS pension scheme

Employer and Employee both contribute 14.5% of salary, ie £21,750pa each

The Defined Benefit Pension Input Amount (PIA) based on the calculation of pension entitlement accrued in the pension input period (ie closing value less (opening value uprated by CPI) x 16) is £45,000

Threshold income

Gross salary £150,000

Less Employee pension contribution paid by ‘Net Pay’ of £21,750

Taxable income £128,250

This client has no other taxable income and no salary sacrifice arrangement.

Threshold income of £128,250 exceeds £110,000 so we need to go on to calculate ‘adjusted income’.

Client’s taxable income is the same as above £128,250

We must add on employee contributions paid by ‘Net Pay’ + £21,750

We also add on the Employer contribution

For a Defined Benefits scheme this is the total PIA minus the employee personal contribution so (45,000 – 21,750) £23,250

Adjusted income is 128,250 + 21,750 + 23,250 = £173,250

Tapered Annual Allowance is the standard £40,000 allowance less the excess adjusted income over £150,000/ 2. So 40,000 – {(173,250 – 150,000) 23,250/2} 11,625 = a reduced annual allowance of £28,375. This client has no unused AA to carry forward.

As the DB PIA is £45,000 this means there is an annual allowance excess of (45,000 – 28,375) £16,625. When added to the client’s taxable income (£128,250) this falls in to the 40p tax band (assuming English tax rates), so the AA excess tax charge would be (16,625 x 40%) £6,650.

The client needs to declare this through a self-assessment tax return, although as the charge exceeds £2,000 they could ask the NHS scheme to pay at least some of the tax charge using 'Scheme Pays'.

Q: Does investment income count for the tapered annual allowance, “adjusted income” calculation?

A: Yes. Taxable income from almost all sources is included in the calculation (taxable pension death benefits can sometimes be excluded).

Q: My client may surrender an investment bond. Would the gain be included when calculating the client’s taxable income for the purpose of the Tapered Annual Allowance?

A: Yes, the full bond gain (not the top-sliced gain) is included when arriving at the client’s taxable income amount for the Adjusted Income and Threshold Income calculations.

Example: In the current tax year Sam’s annual salary is £140,000 with no other sources of income. She pays £10,000 (using the net pay method) into her money purchase pension and her employer also pays in £10,000 . Based on these figures Sam’s Threshold Income would be £130,000 and her Adjusted Income would be £150,000. Although threshold income exceeds £110k she is not subject to a tapered annual allowance as her adjusted income is not more than £150k. However, Sam has held an investment bond for 10 years which she may surrender. The full gain is £60,000. If she surrenders the bond the gain of £60,000 would be added to her taxable income. This would increase her Adjusted Income to £210,000 and in turn reduce her annual allowance to £10,000 (the minimum this can be for the taper). The bond surrender would also mean she will have an annual allowance excess of £10,000, unless of course she has at least £10,000 of unused annual allowance available to carry forward.

Remember that the term “Adjusted Income” relates only to assessing whether or not an individual will be subject to a tapered annual allowance. This is not the same as “Adjusted Net Income” which is total income before any personal allowances and less certain tax reliefs. You still add the full gain, not the top-sliced gain, to arrive at the client’s Adjusted Net Income.

We have a tool to help you calculate a client’s Threshold Income and Adjusted Income position. This is included in our Annual Allowance calculator tool.

Q: Is the value of a post 8 July 2015 salary sacrifice arrangement added back in to both the threshold income and adjusted income calculations under the tapered annual allowance rules?

A: Yes although beware that you do not double count this;

for the threshold income calculation, the salary sacrifice amount is added on to the total taxable income amount,

for the adjusted income calculation, the salary sacrifice amount is taken in to account in the step that adds all employer pension contributions.

Q: When working out a tapered annual allowance, you ignore pre 9 July 2015 salary sacrifice agreement amounts. How is this reflected when working out the total employer contributions that must be taken in to account?

A: There are two calculations to work out (i) if a tapered annual allowance might apply and (ii) if it does apply, how much it is. These are the threshold income calculation and the adjusted income calculation.

Threshold income is increased by adding any post 9 July 2015 salary sacrifice agreement amounts. So conversely, any pre 9 July 2015 amounts are excluded from the threshold income calculations. This measure prevents abuse of the new rules stopping someone being able to simply sacrifice salary now to reduce threshold income. If threshold income is below £110,000 there is no tapered annual allowance and no need to calculate adjusted income. However, where threshold income exceeds £110,000 then you have to work out adjusted income which is a separate calculation.

Adjusted income includes all employer pension contributions. Any salary sacrifice agreement giving up salary for pension contributions instead is treated as an employer contribution. Adjusted income calculations don’t make any allowance for pre or post 9 July 2015 agreements, ALL employer contributions are added.

Q: Is rental income from residential properties included when working out a client’s taxable income for the purpose of the Tapered Annual Allowance and can you deduct residential mortgage interest payments to arrive at the taxable profit.

A: All taxable income is included when calculating Threshold and Adjusted Income figures for the purpose of the Tapered Annual Allowance. This will include the taxable rental income profit from residential property. To arrive at the taxable profit there are various finance costs which can be deducted, although these are to be phased out, covered in “Comparing pension and buy-to-let property for retirement planning”.

Q: Can I deduct gift aid as well as gross relief at source (RAS) contributions to work out threshold income for the tapered annual allowance?

A: No, you follow Steps 1 and 2 of Income Tax Act 2007. The tapered annual allowance calculations then make special provision to allow you to deduct RAS contributions which are usually dealt with at a later step in ITA 2007. There is no mention of gift aid being treated in the same way so it cannot be deducted. This makes sense as the reason you can deduct pension contributions paid to a RAS scheme is to equalise the position with someone who pays their individual contributions using the Net Paymethod.

Payroll giving, however, operates in the same way as salary sacrifice. You make an agreement to give up salary in order to make a charitable donation. This is deducted from gross pay before tax is applied. In this scenario, your starting point for both threshold and adjusted income calculations is your total taxable income - so amounts given up through payroll giving have already been deducted, hence lowering your taxable income starting figure.

Unlike post 9 July 2015 salary sacrifice arrangements for an employer pension contribution, payroll giving is NOT added back on when calculating threshold income figures.

Q: If I will be subject to a tapered annual allowance for the current tax year, at what date can I calculate my actual annual allowance so I can maximise my contribution for tax relief purposes before the end of the tax year?

A: This is going to be tricky. Technically you will be unable to calculate your actual adjusted income until after the end of the tax year. You should be able to estimate your adjusted income taking in to account anticipated earnings including any possible pay rise awards and bonuses you expect to be paid before the end of the tax year, plus all other components of ‘total income’, e.g. bond gains, bank interest, dividends etc.

The self-employed (to calculate relevant earnings) and members of DB schemes (to calculate pension input amounts) also have this issue.

Q: If someone will be subject to a tapered annual allowance (adjusted income will be between £150k and £210k) but the total taxable income figure cannot be accurately estimated at this time, what is the maximum pension contribution that can be paid without exceeding the annual allowance?

A: When considering a personal contribution, the maximum annual allowance will depend on the tapered annual allowance plus any available unused annual allowance that can be carried forward from the three earlier years to the current year. When considering an employer pension contribution, it is important to remember that all employer contributions are included in the adjusted income calculation and as this increases, it further reduces the tapered annual allowance.

We know the tapered annual allowance cannot reduce below £10,000. So a personal contribution of £10,000 plus any available carry forward cannot exceed your client’s available annual allowance (although this may mean you use less carry forward than anticipated). It is not as straightforward when considering employer contributions. Let’s look at an example.

Say we have a client who will have a tapered annual allowance but we don’t know the exact figure. Taking a cautious approach they decide to contribute £40,000 which they assume will use up annual allowance of £10,000 for the current tax year and also carry forward of £20,000 from 3 years ago plus £10,000 from 2 years ago.

Once we reach the end of the tax year, the exact figures are known and we find out the client’s total taxable income was £190,000. If the £40k contribution was paid as a personal contribution, then this client actually had a tapered annual allowance of £20,000 (40,000 – [(190,000 – 150,000)/2]). This would change the proposed carry forward usage shown above. You have to fully use the current year’s allowance i.e. £20,000 for the current tax year before you can use carry forward. To absorb the £40k contribution now only uses the £20,000 from 3 years ago. The unused annual allowance of £10k from 2 years ago is available to be used in the next tax year.

However, if the £40,000 was paid as an employer contribution, this is added on to the taxable income when calculating the adjusted income figure (190,000 plus 40,000) so £230,000, hence the tapered annual allowance remains at £10,000 in this scenario. In order to absorb the current tax year’s pension input amount of £40,000, the carry forward from both 3 and 2 years ago are required.

Q: If contributions paid exceed the tapered annual allowance, once correctly calculated after the end of the tax year, can the member request a refund of the overpayment to avoid the annual allowance excess tax charge?

A: It is not possible to request a refund of contributions to avoid an annual allowance excess tax charge. This rule applies regardless of whether the client exceeds the standard annual allowance, the money purchase annual allowance and/ or the tapered annual allowance (refunds are usually only possible for personal contributions that exceed the members relevant earnings, or for genuine error situations covered in HMRC guidance).